*NEWS*TOO HIGH A PRICE FOR BLACK INK

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*NEWS*TOO HIGH A PRICE FOR BLACK INK

 user 2006-01-16 at 10:22:00 am Views: 57
  • #13554

    Too High A Price For Black Ink
    All
    that copier paper,All those yellow pads, file folders, pencils, and
    pens . The desk chairs, cell phones, laptops. Printer ink cartridges
    priced like caviar. How much can the value of retailing this stuff of
    daily commerce change in a year?
    If you believe the stock market, a
    lot. Back in October, 2004, when this column last examined Office
    Depot, the stock struck me as way undervalued. Back then, it was
    changing hands near 14 a share. Today, with the shares above 31, I have
    to wonder: In a mere 15 months, are Office Depot’s prospects truly 120%
    better? Doubtful.
    I say that not because Office Depot is headed for
    a wreck. On the contrary, the company remains financially strong — it
    has more in cash and short-term investments than it owes in debt — and
    its operations are being intelligently streamlined. For example, two
    domestic catalog units that it had run separately, one under the Viking
    brand, are being consolidated into a single Office Depot-branded
    offering. This and other common-sense efficiencies at its retail
    outlets are the work of Steve Odland. He joined as chief executive last
    March following four successful years leading car parts retailer
    AutoZone (). I didn’t reach Odland, but his chief financial officer,
    Patricia McKay, told me they’re pleased by the stock’s gains. She
    added, “We’ve got the growth priorities to drive [further] improvement
    in shareholder value.”
    JUST THE SAME, it looks as if the stock
    market already has discounted much of what Odland, McKay & Co.
    might do in the foreseeable future. On Feb. 22 the Delray Beach (Fla.)
    company is set to unveil full-year 2005 results. Wall Street’s
    consensus guess is for revenues of nearly $14.2 billion and earnings
    per share of $1.36, a sizable leap from $1.06 in the previous year. In
    2006 analysts are forecasting profits of $1.56 a share, a further gain
    of almost 15%.
    Where would that come from? Some from higher profits
    on fewer shares, since Office Depot remains an aggressive repurchaser
    of its stock. More would come from cutting costs and reorganizing
    operations, particularly in Europe, to expand profit margins. McKay
    noted that more aggressive selling by telephone, more private labeling
    of such higher-margin goods as furniture and paper shredders, plus the
    opening of 100 new stores this year, are all set to boost sales growth
    and widen margins. How fast might sales grow over the next few years?
    How much might margins widen? On those key issues for investors, McKay
    is vague.
    Assume, however, that Office Depot stays on a roll and
    that growth in earnings keeps moving at a good clip. It’s still far
    from clear that Office Depot is the best buy in this end of the market.
    According to Capital IQ, a unit of Standard & Poor’s (), Office
    Depot’s operating profit margin came to 3.8% over the last twelve
    months. Staples’ () was 8%. Through last year’s first nine months, the
    average Office Depot store in North America produced about $198,000 in
    operating profit, vs. $354,000 or so at the average Staples. McKay told
    me “there’s nothing structurally different” between the rivals that
    would bar Office Depot from enjoying margins like Staples’. That will
    mean cutting costs further, expanding revenues, and improving its mix
    of merchandise to include more high-margin items. Yet today an investor
    pays a higher multiple for Office Depot’s earnings than for Staples’.
    Michael
    Souers is an S&P equity analyst who thinks Office Depot is on the
    right track, and is impressed by Odland’s record. Yet when he considers
    the office-supply industry’s growth rate of perhaps 3% a year and sees
    Office Depot trading at 20 times estimated earnings, he balks. “I just
    think the shares have gotten ahead of themselves,” he told me,
    suggesting they’re worth something closer to 26. Almost makes computer
    printer ink look like a bargain.